What Is Micro-Retailing? Why & How Retailers Are Going Small

When the owners of Klado, an online bakery, decided to open a storefront, they settled on a location that was just 50 square feet.

The tiny size of the shop wasn’t due to a lack of budget: the founders, Jen Prado and Jesse Klee, specifically wanted to open up a small shop. They both loved experiencing tiny restaurants on their travels and wanted to mimic the experience.

Source: Jersey Digs

Klado isn’t the only business interested in creating retail storefronts with small footprints. Across the retail industry, small-scale shops are opening. Even giants like IKEA and Target are opening their own mini-stores. 

This trend toward small shops is called micro-retailing.

What is micro-retailing?

Micro-retailing is defined as a retail model including things like small-scale pop-up shops and boutique storefronts that leverage a variety of innovative downsized activities.

Lately, micro-retailing has been growing in popularity as ecommerce merchants experiment with opening lower-risk physical retail spaces.

Here’s how Kristen LaFrance, host of Shopify's Resilient Retail podcast, sums up the concept and the possibilities it presents:

“Micro-retailing is a great way for ecommerce and DTC brands to test out a retail opportunity. We’ve seen companies place vending machines in cities, take over taco trucks, and launch pop-up locations to test locations and audiences and to see how the brand translates into physical retail.”

"Micro-retailing is a great way for ecommerce and DTC brands to test out a retail opportunity."

Benefits of micro-retailing

So what are the benefits of micro-retailing?

Micro-retailing provides merchants with several perks that standard storefronts simply can’t. These benefits also spotlight why merchants seem to favor smaller spaces.

Requires lower overhead

The most obvious benefit of a small storefront is that it costs less money.

The rent is cheaper, there’s not as much space to fill, and you don’t need a large staff to manage it. A micro location can save thousands in rent alone. In New York City, for instance, average rent for retail space in 2018 was $680 per square foot.

This lower overhead is a major benefit to merchants experimenting with brick-and-mortar stores for the first time. Micro-retail locations are lower stakes than flagship stores because they are cheaper.

As LaFrance says, “Micro-retail allows brands to get that in-person, three-dimensional brand feel that regular retail brings…but without having to drop a massive amount of cash.”

Less room for stock means more room for innovation

Because small stores don’t have room for much inventory, they can instead focus on providing a unique, memorable experience and use those savings to invest in innovation.

Freed-up budgets can go to the implementation of experience-driven technology improvements, like digital mirrors or well-trained staff that can provide highly personalized service. 

Source: Digital mirrors at Neiman Marcus via HiveLife

The smaller size of a micro-retail space requires innovation—even for established brands.

A big-box retail store like IKEA, for example, had to discover new ways to display merchandise in micro-retail spaces while curating its limited in-store inventory. 

This is exactly what it does with a variety of its micro-retail locations that include kitchen-planning studios, which also serve as an environment for experimenting with customer experience improvements.

Small retail stores can tailor to the local community

Becoming a part of the community is particularly appealing to brands that historically have been online-only. Most brands are founded with strong values and stories, and a micro-retail presence offers an opportunity for them to bring those elements to life for in-person shoppers.

Smaller storefronts are, by nature, more reminiscent of local mom-and-pop shops with a home-grown feeling. Merchants can further leverage this angle by becoming involved in the community and by tailoring inventory and decor to reflect the region it’s located in.

H&M, for example, opened a microlocation in the Berlin Mitte neighborhood. There it curated an inventory of brands from the city and integrated with the local community by hosting in-store yoga classes, gatherings, and lectures. 

Source: Global News

Thorsten Mindermann, Country Manager at H&M Germany, noted H&M chose the location in Mitte strategically: it had traditionally served as a meeting place for the people of Berlin, and by opening a micro-retail store there, H&M hoped to continue and participate in that tradition.

Allows for lower-risk experimentation

When DTC lingerie brand LIVELY decided to open its first brick-and-mortar pop-up store in New York City, founder Michelle Cordeiro Grant wanted to use the physical space to bring her LIVELY community together.

The pop-up shop was built off of the learnings Grant had taken from six months worth of events across the US.

Initially, the location didn’t stock much inventory because Grant saw it more as a place for customers to hang out, to try on products, and then to buy online later.

She quickly realized that while LIVELY customers enjoyed the relaxed atmosphere, they also wanted to leave with product in hand. So the location pivoted. 

“The location operates more like a clubhouse,” says Grant. “But it’s also now a completely stocked shop.” 

Today at LIVELY’s store, you’ll now find women escaping the busy streets of New York, drinking coffee and chatting while perusing undergarments. Grant has made the store a safe space where women can shop for intimates or just take a deep breath.

Pre-COVID, LIVELY’s permanent location was still actively hosting events to stay involved with its community, ranging from a financial planning lecture to a fireside chat with author Alexandra Amarotico. It’s since transitioned to online events.

The results of the relaxing experience have been wildly successful. Fifty percent of customers now discover the brand in person, and Grant actually thinks of the storefront as a billboard. With digital marketing channels becoming ever more expensive, LIVELY is able to effectively utilize its storefront for customer acquisition instead.

How to launch a successful micro-retail store

Micro-retailing has been in action for some time now. There are many best practices you can learn from the success other brands have experienced.

1. Partner with other stores

Micro-retail stores can be set up in many kinds of spaces, including within other stores.

In 2015, Birchbox opened up a micro-retail pop-up store within clothing retailer Rent the Runway’s Washington, DC, location.

Source: Washingtonian

Since the businesses offered complementary products to similar audiences, the partnership was mutually beneficial. Customers could completely outfit themselves for a night out all in one space. 

Birchbox isn’t the only company to have found benefit in partnership.

In 2006, Sephora began opening locations within JCPenney stores—often in malls that already had a Sephora location—and found great success. The concept worked so well that by 2019 there were 660 Sephora locations within JCPenneys across the US.

When looking for another retail partner to team up with, there are a few things to keep in mind:

• You must have overlapping audiences. To be successful, your core audiences need to align. However, some slight differences in audience can bring you both new customers.
• Look for merchants offering products that complement yours. A vacuum retailer and a shoe merchant might have an overlapping audience, but most people aren’t interested in buying shoes when they buy a vacuum, and vice versa. Rather, the vacuum retailer would find more success partnering with a cleaning-supply store.
• Make sure to keep your brands clearly separated. Sephora’s JCPenney locations are carefully demarcated to demonstrate a separate brand experience. 

2. Give back to the local community

A brand’s values have become paramount to shoppers. 

Ann Mukherjee, Chairman and CEO of beverage company Pernod Ricard USA, summed this up well, saying, “People are not just looking to buy brands, they’re looking to buy into brands.”

While it’s a good idea to have all of your retail store locations giving back to their communities, highlighting your values can be especially valuable within micro-retail storefronts. Participating in the local community serves as a marketing opportunity as well as an opportunity to do good.

Some ideas for ways to give back to and get involved with your local community include:

• Run donation drives for local shelters and soup kitchens.
• Host events on topics that interest your audience. Busboys and Poets, a Washington, DC, restaurant chain regularly hosts debates, lectures, and other political events. These events bring in new customers and drive loyalty with returning customers. 

Via their Facebook page

3. Develop an experience that’s focused on what makes your brand successful

Micro-retail locations need to adhere to the core of what makes their brand successful.

Sephora recently learned this the hard way.

In 2017, it announced its micro-retail concept, Sephora Studio. These would be micro-retail stores less than half the size of Sephora’s traditional storefronts and focused on services rather than products. 

Source: Palisadian-Post

By early 2020, Sephora had abandoned the project after opening only five locations. 

According to Jeff Gaul, Sephora’s SVP of Real Estate and Store Development, Sephora believed the concept had failed due to the lack of stock variety offered in the micro locations.

Gaul also noted that a large assortment is what customers love about Sephora. The physical locations give customers a chance to play with the products they’ve seen influencers use. 

Going forward, Sephora will continue to open small retail locations but focus on the vibrant product assortment rather than its services.

A micro location should exist as an experience that crystallizes your core offering. And like Sephora, if you don’t get it quite right on the first go, you can adjust it along the way.

4. Use market segmentation to tailor assortments to the local buyer

It’s common that certain inventory is more successful in some places than others. For instance, umbrellas aren’t as big a seller in Arizona as they are in Seattle. Micro-retailers have the opportunity to curate their inventory as it relates to a given location. 

Taylor Daniel, co-founder of FOMO agency and former merchandiser for Levi’s, Old Navy, and Johnston & Murphy, says this on this topic: 

“When considering how much inventory to buy for your small stores, it’s helpful to stay aware of the sales-per-square-foot KPI. Offerings must be thoughtful and calculated in small-format stores to drive conversions. Market segmentation is also a critical step in tailoring your assortments regionally.” 

"Offerings must be thoughtful and calculated in small-format stores to drive conversions."

Market segmentation is the process of identifying the groups of people most likely to become customers. People with different backgrounds and incomes each respond uniquely to your inventory. These anomalies are often missed opportunities for SMB merchants who lack the tools to discover the differences.

If you already have physical retail locations, divide your selling territory into local sections, then attribute your store transactions by regions. Once that’s done, you can see what’s selling best in each location and use that to inform your choices.

Ecommerce-only businesses can segment by attributing orders to regions via their customers’ addresses. Use the data from the region you’ll be opening your micro location in to curate your inventory.

Target has discovered how powerful market segmentation is for micro-retailing.

Its mini-stores are each opened with a very specific local clientele in mind. For instance, it recently opened 10 micro locations near college campuses across the US. Each of these stores is filled with inventory meant to appeal specifically to college students. 

Source: Target

Target has found these small format stores with hyper-localized inventory to be twice as productive as its standard stores. In fact, they’ve been so successful, Target is now rolling this merchandising technique out to larger locations.

Micro-retailing: a baby step into the world of physical retail

Micro-retailing helps create unique, in-person customer experiences. It can drive your brand’s convenience and make the most of the modern omnichannel shopping world. It even makes it easier for retailers to create physical human connections (all while staying within budget).